A blockchain is a distributed database and shared ledger that maintains a continuously growing list of records, called blocks, in chronological order. In most blockchains, new blocks and the data within are confirmed and verified through a decentralized consensus process called mining.
Because this verification process removes intermediary validation and establishes trust without using a centralized authority, blockchain technology may become one of the most important financial services innovations of the 21st century.
Whether a blockchain is private or public, and whether it allows transactions or contracts, the very concept of a decentralized ledger has the potential to change the insurance industry on the same scale as the internet—and maybe even more.
How Does It Work?
After a block is confirmed and the data within is verified through the mining process, the block is time-stamped and added to the preexisting blocks in the chain. Each node in the system has a copy. The blockchain is encrypted and considered immutable, meaning it is protected against tampering and revision.
While bitcoin is the most recognizable blockchain application to date, note that bitcoin is not the only cryptocurrency, nor is its blockchain the only blockchain. Nearly 1,000 cryptocurrencies exist, and many serve a specific purpose.
For example, cryptocurrencies like Steem are devoted to social networking. Some, like IOTA, focus on the Internet of Things, while others center on privacy, like Dash, Monero and Zcash. Some developers simply copied the bitcoin open-source code and altered it slightly, as was the case with Litecoin.
Of all the cryptocurrencies and blockchains, however, Ethereum is bitcoin’s main competitor. Ethereum is a world computer that allows coded contracts to be built and inserted into the Ethereum blockchain, where smart contracts are enforced and verified without middlemen. The goal is to create a globally decentralized digital computer that can be used to execute peer-to-peer contracts with a cryptocurrency called ether.
Ethereum highlights blockchain’s “smart contract” capability—programmable code that can be built into and stored in a blockchain—which has the potential to drastically change business by automating many administrative processes.
Who’s Using It Now?
Blockchain’s pace of growth is staggering and shows few signs of slowing down. The Institutes observes that all major industries are already using blockchain, from Walmart’s logistics to Disney’s customer service to the Food & Drug Administration’s health records. McKinsey & Company expects capital market spending to increase 59% every year through 2019.
As investment flows into blockchain applications, many organizations, including banks, are investing individually and through blockchain consortia. These consortia are primarily tasked with creating private and permissioned blockchains that tackle industry problems and establish policies and practices around blockchain usage. This is very similar to what happened with the worldwide web, where most business testing took place on local area networks before jumping to the public internet.
What About Insurance?
Insurers are eager to explore the many ways blockchain could influence the insurance industry. Consider Etherisc, which recently developed a crop insurance decentralized application. With this application, if a crop is destroyed due to a covered reason (drought or flood), a smart contract built through blockchain technology could check for the weather-related incident in a given area and automatically deliver a claims payment to affected insureds.
It’s a simple but powerful demonstration of how blockchain and smart contracts can lower costs through automation. But McKinsey identified 64 use cases for blockchain technology in the insurance industry. The potential applications are vast and will touch independent agents in a number of ways:
| Products, Pricing and Distribution | Underwriting and Risk Management | Policyholder Acquisition and Servicing | Claims Management | Finance, Payments and Accounts | Regulation and Compliance |
| Parametric insurance | Provenance | Policyholder acquisition | Fraud registration | Netting and payments across countries | Real-time regulatory monitoring |
| Insurance included in transactional purchases | Data sharing and risk registries | Placement documentation | Claims automation | Subrogation | Education and licensing cataloguing |
| Mobile insurance for developing countries | Peer-to-peer insurance | Know your customer and anti-money laundering efforts | Multilayer claims settlement | New forms of raising capital, such as crowdsourcing | Proof of insurance |
As it explores how blockchain can create competitive advantages, the insurance industry will likely follow the lead of other industries, where researches have focused on use cases that:
- Are not overly complicated.
- Contain a pervasive issue that may be scalable to other issues.
- Will result in immediate cost savings.
As the industry develops more applications and standards for blockchain technology, insurers will be able to begin prioritizing blockchain initiatives and rolling out changes to customers. And as gatekeepers for the industry, independent agents and brokers will be on the front lines of communicating these changes to existing and prospective clients.
Patrick Schmid is an economist and vice president of The Institutes’ RiskBlock Alliance—a blockchain consortium focused on the risk management and insurance industry.
Want more information about blockchain technology? Check out the Agents Council for Technology’s risk advisory on the topic.
